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[2012] ZAGPPHC 76
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Business Partners Ltd v Silver Stars Trading 245 CC and Another (14408/2008) [2012] ZAGPPHC 76 (15 May 2012)
REPORTABLE
IN THE NORTH GAUTENG HIGH COURT,
PRETORIA (REPUBLIC OF SOUTH AFRICA)
CASE NO: 14408/2008
DATE:15/05/2012
In the matter between:
BUSINESS PARTNERS LIMITED
…..........................
PLAINTIFF/APPLICANT
(Registration number: 1981/000918/06)
And
SILVER STARS TRADING 245 CC
......
1st
DEFENDANT/1ST RESPONDENT
HERMAN PAUL MULLER
...................
2nd DEFENDANT/2nd RESPONDENT
JUDGMENT
KOLLAPEN, J
[1] This is an action in which the
plaintiff seeks as against the first and second defendant payment of
the following amounts:
1.1 In respect of claim A the sum of
R164 283.67 plus interest at 10% per annum from 25 January 2012 to
date of payment.
1.2 Claim B – the sum of R3
279.94 plus interest at 10% per annum from 25 January 2012 to date of
payment.
1.3 Plaintiff also seeks costs in
respect of both claims.
[2] The first and second defendant
have instituted a counter-claim in respect of which they seek payment
of the sum of R121 693.00
plus interest as well as costs.
Background
[3] The plaintiff is a corporate
entity whose main business is that of providing business finance for
small and medium businesses
generally under circumstances where
prospective lenders were unable to secure finance from established or
commercial banks.
[4] In providing finance the plaintiff
would seek to obtain security where this was possible but in addition
would, in order to
secure its investment and provide for a proper
return, consider holding a share in the business to be financed or
provide for the
payment of a “royalty” to be paid by the
borrower based on turnover.
[5] In 2004 the second defendant
acting on behalf of the first defendant approached the plaintiff to
seek financing for a bottle
store it (the first defendant) intended
purchasing. Following a formal application submitted by the first
defendant, finance was
approved on 4 May 2004 which resulted in the
parties concluding the following written agreements on or about 26
May 2004:
(a) A loan agreement for the principal
debt of R500 100.00 and in terms of which the principal debt plus
interest would be repayable
by the first defendant over sixty
instalments at R11 252.00 per month commencing on 1 July 2004.
(b) The loan agreement provided that
in the event of the first defendant not making payment when due the
full loan with interest
and outstanding royalties would immediately
become due and payable.
(c) A royalty agreement in terms of
which the first defendant was to pay to the plaintiff a royalty of
1.4% on the higher of the
projected or actual turnover of the
business to be financed and to be know as East Lynn Discount Liquor.
(d) The royalty agreement provided
inter alia
that in the event of the borrower (the first defendant) –
(i) repaying the loan prior to the
lapse of the term of the loan;
(ii) sells or for any reason
terminates the business for which the loan was granted; or
(iii) breaches the terms of the loan
agreement or royalty agreement; or
(iv) is sequestrated or liquidated;
or
(v) the loan agreement is cancelled
prior to the lapse of the period of the loan, the borrower (the first
defendant) shall immediately
pay to Business Partners (the plaintiff)
an amount equal to the royalty for the unexpired period of the full
term of the loan together
with outstanding royalties.
[6] The first defendant prepared a
schedule calculating the royalty fee payable which schedule was
annexed to and formed part of
the royalty agreement. It is not in
dispute that it was based on the projected turnover and that for the
most part while the first
defendant operated the business, the
projected turnover exceeded the actual turnover.
[7] The second defendant bound himself
in writing as surety and co principal debtor for the first
defendant’s indebtedness
to the plaintiff in an unlimited
amount.
[8] The plaintiff advanced the monies
in terms of the loan agreement for and on behalf of the first
defendant.
[9] It is common cause that after a
few months of operating the liquor store, the first defendant began
defaulting on payments in
terms of the loan agreement and in December
2004 wrote to the plaintiff setting out its difficulties with regard
to maintaining
payments and proposed various options, including the
sale of the business to a third party.
[10] As a consequence of these
difficulties the first defendant managed to obtain a buyer for the
business, Redlex 283 (Pty) Ltd
(Redlex) for a purchase consideration
of R396 000.00. The plaintiff approved, as it was required to
do in terms of the loan
agreement, the sale of the business from the
first defendant to Redlex.
[11] Various meetings in this regard
were held prior to the conclusion of the sale agreement between the
first defendant and Redlex
and were attended by Mr Windell
representing the plaintiff, the second defendant and Mr Bruwer
representing Redlex.
[12] It was a term of the written
agreement between the first defendant and Redlex that Redlex would
pay the purchase price of R396 000.00
by way of thirty-six
instalments of R11 000.00 each directly to the plaintiff.
[13] This did not happen as Redlex
paid its instalments directly to the first defendant in the sum of
R11 000.00 per month
as contemplated in the agreement between
the first defendant and Redlex. The first defendant in turn paid the
plaintiff by way
of debit order and the amounts of such payments
varied in accordance with the applicable interest rate. By way of
example in April
2006 the amount was R11 007.90 when the
interest rate was 11.5% per annum while in February 2008 it was
R11 569.07
when the interest rate was 15.5%.
[14] The first defendant made up the
difference between the amount it received from Redlex, (R11 000.00)
and the actual amount
that became due on a monthly basis to the
plaintiff regard being had to the fluctuation in interest rates.
[15] Independently of payments on the
loan account the first defendant effected ongoing and fairly regular
payments on the royalty
account. In this regard and following the
conclusion of the sale of business to Redlex the plaintiff on
5 October 2005
calculated the royalties then outstanding
and due as R249 115.00. The plaintiff agreed to write off
R145 249.38 of such
royalties leaving a balance of R118 406.81
in respect of which it required payment over thirty-six months at
R3 289.08
per month.
[16] Redlex made all payments due over
the thirty-six month period to the first defendant and the first
defendant in turn serviced
the loan account it had with the plaintiff
over the same period.
[17] The first defendant stopped
making payments on the loan account and the royalty account in August
2008 which coincided with
the termination of the Redlex obligations
to the first defendant.
[18] The plaintiff’s claim
against the first and second defendant in respect of the loan account
represents, according to
the plaintiff, the outstanding balance in
respect of the loan account and the plaintiff relying on clause 25 of
the standard terms
and conditions of the loan agreement ,relies on
the certificate of balance under the signature of its legal manager
to this effect
and which certificate dated 13 February 2012
reflects an outstanding balance of R164 283.27.
[19] The plaintiff similarly relies on
a certificate of balance under the signature of its legal manager and
dated 13 February 2012
reflecting an outstanding balance of
R3 279.94 in respect of its claim relevant to the royalty
agreement.
[20] The first and second defendant
while admitting the contents of the written agreements entered into
with the plaintiff, have
raised the following defences:
In respect of the claim relevant to
the loan agreement it pleads that it effected a compromise with the
plaintiff at the time of
the conclusion of the sale of business to
Redlex in terms of which the plaintiff would accept in full
settlement of its claim in
respect of the loan agreement the sum of
R396 000.00 which was payable over 36 months and which was in
fact paid to the plaintiff
and alternatively:
The plaintiff, first defendant and
Redlex entered into a tripartite agreement in terms of which it was
agreed between the parties
that Redlex would pay the full outstanding
indebtedness of the first defendant to the plaintiff; that the
plaintiff provided Redlex
with the outstanding amount of such
indebtedness which was R396 000.00 and which Redlex then paid
over 36 months to the plaintiff.
[21] The evidence on this issue
consisted of three witnesses. Mr Windell the business development
manager of the plaintiff, while
confirming that the plaintiff gave
its approval to the sale of business from the first defendant to
Redlex as well as providing
a settlement figure in the sum of
R396 000.00, maintained that notwithstanding the sale of the
business the first and second
defendant would continue to remain
liable for all outstanding amounts on the loan account even after the
receipt of the thirty-six
monthly payments. He denied that a
compromise was effected or that a tri-partite agreement was entered
into.
[22] Mr Muller, the second defendant
in his evidence said that he believed that once he concluded the
agreement of sale with Redlex
and provided Redlex paid the settlement
figure provided by the plaintiff, the first and second defendant
would have no further
indebtedness to the plaintiff arising out of
the loan agreement.
[23] In cross-examination, however, he
accepted that the original loan term was for sixty months which would
ordinarily have ended
in June 2009 and that the payments from
Redlex would cease in August 2008 leaving an outstanding period in
the timeline of
the contract of some ten months.
[24] In addition Mr Muller testified
that when the sale was discussed between Windell, Bruwer and himself
he may have incorrectly
formed the impression that the sale of
business to Redlex and the payment of the purchase price would result
in the termination
of the first and second defendant’s
indebtedness to the plaintiff. He also conceded that there was no
specific agreement
reached between the first defendant and plaintiff
in terms of which the plaintiff would write off any amounts due on
the loan account
after the thirty-six month period.
[25] On this aspect it is trite that
the
onus
to prove a compromise is on the party alleging a compromise. See
Hubbard v Mostert
2010 2 SA 391
(WCC) see also Christie:
The Law of Contract in South Africa
(6
th
edition) page 473.
[26] On the evidence of the first and
second defendant it is clear that no agreement of compromise was
effected between the plaintiff
and the first and second defendant
regarding the indebtedness of the defendants on the loan account. At
best the defendants may
have formed the subjective impression that
there was some form of compromise but Mr Muller’s concession
that such an impression
was probably incorrect and not supported by
the facts really disposes of this defence quite decisively.
[27] The defence of a compromise is
simply not sustainable and the defendant has failed to discharge the
onus
of proving that a compromise was effected. On the probabilities
there would be no reason why the plaintiff would write off an
amount
that would ordinarily be due to it in terms of its loan agreement.
[28] The only other aspect in issue
was the correctness of the outstanding balance the plaintiff claimed.
Mr Windell identified
the signature of Mr Fray on the certificate of
balance as the legal manager in support of this claim and Mr Mark
Lewis a senior
accountant with the plaintiff also confirmed the
correctness of the balance which he was able to verify conducting his
own independent
calculation.
[29] That being the case the plaintiff
in my view has proved its claim in respect of this part of the action
and there is no reason
why the plaintiff should not be entitled to
judgment and other relief in respect of claim A. I intend to
make such an order.
[30] I now proceed to deal with claim
B as well as the counter-claim.
[31] The plaintiff’s stance with
regard to the agreement titled the “royalty agreement”
and signed by the parties
during May 2004 was that in view of
advancing money to the first defendant and in respect of which the
plaintiff carried a higher
risk to the extent that it had very
limited security for the money advanced, it, the plaintiff was
entitled to a proper return
on its money and the royalty agreement
provided a basis for such return.
[32] Mr Windell’s testimony was
that the plaintiff worked towards a return of 28.6% on monies lent
and that the interest payable
in terms of the loan agreement together
with the royalty agreement would together constitute such a return.
His further evidence
was that to the extent that the royalty
calculation was based on the projected turnover of the business to be
financed, these projected
turnover figures were provided by the
second defendant who was fully aware of the nature of the royalty
agreement entered into
between the parties.
[33] His further testimony was that
when the first defendant sold the business to Redlex the plaintiff
gave the first defendant
a reduction in royalties and the amount then
due and which was fully set out in a letter dated 5 October 2005
dispatched
by himself on behalf of the plaintiff to the second
defendant.
[34] In cross-examination he accepted
that the “royalty” to be paid was actually interest on
the monies lent to the
defendants and beyond providing the loan to
the first defendant the plaintiff did not provide any other service
or make available
any intellectual property or the like to the
defendants.
[35] The business of the plaintiff in
his view was to lend money and that is all that it did in relation to
the defendants. He
was also in agreement and to the extent that the
calculation of the royalty was based on projected income that in
truth and reality
the actual income of the business was lower than
the projected income.
[36] Finally he also confirmed that
the plaintiff would generally seek to enforce the payment of the
royalty for the full period
of the loan even if the loan was paid
earlier and in full. He confirmed in this regard that the first
defendant had paid R121 693.00
to the plaintiff arising out of
the royalty agreement. In this regard the evidence of Mark Lewis put
this figure at R133 524.52.
[37] The defendants stance with regard
to the royalty agreement was that at the time of signing of the
agreement Mr Muller the second
defendant believed that the agreement
was in order. He had no legal background and was not advised by an
attorney at the time
he concluded the loan on loyalty agreements. He
confirmed that he provided the projected turnover figures used in the
royalty
agreement but states that he simply took the figures from the
records of the previous owner of the business. He understood the
royalty agreement as providing a basis to pay additional interest
relating to the loan given to him by the plaintiffs.
[38] His evidence was that he was
subsequently advised by counsel that the royalty agreement may not
have been lawful and based
on the advice he received instituted a
counter claim. The position thus taken by the defendants is
that the royalty agreement
is
contra
bonos mores
, in that it was
a simulated transaction and an attempt by the plaintiff to charge
additional interest.
Discussion / Analysis
[39] The payment of royalties is
normally associated with a franchise agreement which was described by
NUGENT AJA (as he then was)
in
De
Beer v Keyser and Others
2002 1 SA 827
as “a system in which one organisation (the
franchisor) grants the right to produce so or use a developed product
service
or brand to another organisation (franchisee). Royalties
based on turnover are usually paid by the franchisee.” There
is
no dispute in these proceedings that notwithstanding its
description as a “royalty agreement”, the agreement was
nothing
less and nothing more than an agreement by the first and
second defendant to pay interest to the plaintiff over the period of
the
loan.
[40] The question to be determined is
whether the agreement can be said to be contrary to public policy and
as such unenforceable.
[41] In
De
Beer v Keyser supra
the
court said as follows:
“
There might well be
circumstances in which an agreement, unobjectionable in itself, will
not be enforced because the object it seeks
to achieve is contrary to
public policy. Nevertheless a court should be cautious when it
performs its role as arbiter of public
policy.”
[42] The court also relied on the
dicta in
Sasfin (Pty) Ltd v
Beukes
1989 1 SA 1
(AD) to
the effect that the impropriety of the transaction should be
convincingly established in order to justify the exercise
of the
court’s power to declare it contrary to public policy.
[43] It is clear that if regard be had
to the dicta in
De Beer
and in
Sasfin
then there is no doubt that a court should act cautiously in this
regard and that in addition the doctrine should only be invoked
in
clear cases where harm to the public is substantial and does not
depend on the idiosyncrasies of the judicial mind.
[44] In
Barkhuizen
v Napier
2007 5 323 (CC)
the Constitutional Court also confirmed the approach to be taken in
this regard indicated that the principle of
contract, Pacta sunt
Servanda is not a sacred cow that should trump all other
considerations. The court indicated that the constitutional
values
of equality and dignity as well as the parties relative bargaining
positions would be an issue in the court exercising the
discretion it
did have in dealing with contracts where a challenge was brought on
the grounds of public policy.
[45] One is also mindful in this
regard of the caution often expressed that courts should guard
against creating uncertainty as
to the validity of contracts as well
to guard against the arbitrary and indiscriminate use of judicial
power in setting aside such
contracts. On the other hand it must
also be apparent that if regard be had to the architecture of our
constitutional order and
in particular the values upon which it is
premised in particular those of equality and human dignity then
courts should also in
appropriate cases not hesitate in striking down
contracts that offend against the principles of public policy as
encapsulated in
the constitution.
[46] When one looks at the royalty
agreement both on its own as well as in relation to the loan
agreement then the following is
evident:
(a) It is clear on the undisputed
evidence that even though it was styled a “royalty agreement”
it was not a royalty
agreement but simply an agreement to pay
interest in addition to the interest that the defendants would pay on
the loan agreement.
(b) On the evidence of the plaintiff
the composite interest charged if one has regard to both the royalty
and loan agreement would
have been close to 29%. It warrants mention
that at the time in question when the contracts were concluded in May
2004 the interest
rates applicable in terms of the Usury Act would
have been 18% in respect of a loan up to R500 000.00 while there
would be
no maximum interest rate prescribed on a loan in excess of
R500 000.00.
(c) The plaintiff contends that the
Usury Act was not applicable as the loan was in excess of R500 000.00
namely R500 100.00.
While this may be so the following is
instructive:
(i) It appears that the loan amount
was fixed as it were in order to ensure that it was brought above
R500 000.00. Mr Windell
who testified on behalf of the
plaintiff was not able to convincingly refute the suggestion that the
manner in which the loan was
structured was in order to avoid the
application of the Usury Act.
(ii) when one looks at the loan amount
of R500 100.00 and the manner in which it is made up and if one
has regard to the fact
that the second defendant’s evidence was
that he applied for a loan of R590 000.00 it does becomes
strange and almost
inexplicable that the loan is finally approved in
the amount of R500 100.00.
(iii) there appears to be no
mathematical or other basis why the loan was ultimately approved for
R500 100.00.
(iv) absent a mathematical or other
laudable explanation the only inference that can be drawn and that is
supported by the facts
is that the loan amount was fixed at
R500 100.00 in order to avoid the provisions of the Usury Act.
[47] In the light of the uncontested
evidence that the royalty agreement was simply an agreement to pay
interest then there would
be no good reason in fact or in law to
treat them separately in determining the rate of interest that would
then cumulatively have
become applicable. In this regard the
amount of the interest payable would have been 28.6% on a loan of
R500 100.00.
[48] The royalty agreement contains an
express provision that notwithstanding a number of events including
the payment of the loan
prior to the lapse of the term of the loan,
the royalty for the unexpired term and outstanding royalties will
immediately become
payable. Thus even though the royalty agreement
is nothing more than an interest agreement the obligation to pay
interest even
after the loan has been settled is firmly entrenched in
terms of clause 4.2 of the royalty agreement.
This provision should not in my view
escape scrutiny in particular where the parties’ bargaining
power and positions were
not equiposed. It is both onerous and
oppressive in my view. Even if a higher rate of interest can be
justified on the basis
of a higher risk that is undertaken, I cannot
see how this can be used to justify payment once the risk has passed
(which would
have happened if the loan was repaid earlier).
[49] When one considers the position
of the defendants then the following is of importance. In an e-mail
to Mr Bruwer of Redlex
dated 5 November 2008 Mr Muller in
effect says that he signed many documents and he is now compelled to
accept the consequences
thereof. Clearly the suggestion is that
having signed many documents he must now accept it does not portray
the image of an individual
who had equal bargaining power with the
plaintiff as he testified in re examination that he accepted the
documents for signature
as they were prepared by and on behalf of the
plaintiff.
[50] Even though this may not be
relevant to the attack on the agreement as being
contra
bonos mores
, the plaintiff
notwithstanding its characterisation of the royalty agreement as
simply an interest agreement sought to levy value
added tax on the
interest payments that became due and which were then paid by the
first and second defendants.
[51] When one thus has regard to the
royalty agreement taken together with the loan agreement and
considers its terms and purposes
there is a compelling argument that
the plaintiff was intent on ensuring the non application of the
Usury Act. The loan amount
of R500 100.00 does not lend itself
to a clear arithmetical breakdown that could suggest that the figure
was not contrived.
On the contrary and on what is before me every
attempt was made to bring it just above R500 000.00 and it was
finally pegged
at R500 100.00. In this regard and included in
the loan amount was an amount for due diligence which was simply due
to the
plaintiff on account of it approving the loan and taking
whatever steps it may have taken administratively to place itself in
a
position to approve the loan.
[52] If the ultimate loan amount was
R100.00 less then clearly there could have been no argument that the
Usury Act would not have
been applicable and that interest on the
loan agreement taken together with the interest on the royalty
agreement would have led
to the conclusion that the effective rate of
28.6% would have been in conflict with the Usury Act. If this has
happened there
would have been no basis on which the plaintiff would
have been entitled to claim interest in excess of the Usury Act.
[53] I accordingly cannot be convinced
that in the context of this matter the additional R100.00 to take the
loan over R500 000.00
was justified on any other basis other
than the desire to avoid the provisions of the Usury Act. Clearly
the first and second
defendant even though they may have been aware
that they were paying a higher rate of interest could hardly be said
to be in agreement
to construct an agreement that would avoid the
provisions of the Usury Act.
[54] The provision of finance is
important in facilitating business growth and development and is
correctly seen as an important
precondition and a catalyst in this
regard. However, the grant of finance under onerous and oppressive
conditions also has the
potential to cause considerable harm to
emerging businesses.
[55] Public policy not based on the
individual idiosyncrasies of members of the judiciary as was
cautioned against in
Brisley
v Drotsky
2002 4 SA 1
(SCA)
but on the values of the constitution in particular freedom, equality
and human dignity must mean that while courts should
not readily
interfere in the domain of contractual freedom. In instances,
however, where the facts and circumstances warrant interference
it
could be said that in order to give effect to the public policy
imperatives of our constitution such interference by our courts
may
not only be desirable but necessary as well.
[56] In my view and having regard to
the facts of this case it would not have the unacceptable result of
creating widespread uncertainty
with regard to contractual issues nor
would it constitute the exercise of arbitrary and indiscriminate
power. If one has regard
to the salient features of the facts and
evidence then the following is clear.
(a) On the face of it the royalty
agreement was a simulated agreement and was nothing other than an
agreement to pay interest.
(b) The loan amount of R500 100.00
was contrived to avoid the provisions of the Usury Act.
(c) The interest payable of 28.6% was
considerably higher than the maximum permissible on loans of
R500 000.00 in terms of
the Usury Act.
(c) The terms of the royalty agreement
were in my view oppressive and harsh to the extent that it created
the obligation to pay
interest even after conditions that ordinarily
in contract would result in the cessation of interest payments (the
full amount
of the loan being paid) would be met.
[57] For those reasons this would be
an appropriate case for such interference and in my view the royalty
agreement would such an
agreement that undermines public policy in
that the objective it seeks to advance is a calculated avoidance of
the Usury Act and
a desire to levy interest beyond that permissible
in law.
[58] The plaintiff’s claim with
regard to count B should be dismissed and the defendant’s claim
on account of those
considerations should be upheld.
I accordingly make the following
order:
1. In respect of claim A
the plaintiff's claim is upheld in the sum of R164 283.67 plus
interest thereon at the rate of 10% per
annum from 25 January 2012 to
date of payment.
2. Defendants are ordered
to pay the plaintiff's costs in relation to claim A.
3. In respect of claim B
the plaintiff's claim is dismissed with costs.
4. The defendant's
counter-claim in the sum of R133 254.52 is upheld with interest a
tempore morae from date of judgment to date
of payment
5. Plaintiff is ordered
to pay the defendants' costs in respect of the
counter claim.
N KOLLAPEN
JUDGE OF THE NORTH
GAUTENG HIGH COURT
14408/2008/sg
Heard on: 7 March 2012
For the Plaintiff:Adv J E
Ferreira
Instructed by: Messrs
Strydom Brits Mohulatsi
For the Defendants: Adv C
J Van Coller
Instructed by: Messrs
Jacques van der Merwe Attorneys
Date of Judgment: